VES-13-18-CO:R:IT:C 111170 LLB
Deputy Assistant Regional Commissioner
Commercial Operations Division
ATTN: Regional Vessel Repair Liquidation Unit
New Orleans, Louisiana 70130
RE: Vessel repair; Application for relief; Modifications;
Negotiated shipyard discount; Shipyard overhead charges
Boiler access; Entry No. C20-0012279-9; Vessel S/S
CLEVELAND, V-5
Dear Madam:
Reference is made to your memorandum of July 9, 1990, which
forwarded for our review the Application for relief from vessel
repair duties filed by Sealift, Inc., in regard to the above-
captioned vessel repair entry.
FACTS:
In March of 1990, the vessel S/S CLEVELAND was taken to
Greece in order to undergo extensive repairs, modifications, and
inspections. The total cost of the operations was nearly
$345,000.00. The opinion of Headquarters is sought regarding
five items/matters, as follows:
1. Entered item number 40, the addition of access plates
in the ship's boilers.
2. Entered item number 48, the replacement of "mild steel"
bolts on the anchor windlass brake with bolts made of
stainless steel.
3. Entered item number 81, the cleaning and coating of a
forward deep tank in order to make it suitable for the
carriage of foodstuffs rather than general and liquid
cargoes.
4. Shipyard overhead expenses for office salaries, rent,
insurance, etc., calculated in the amount of 10 percent
of the total shipyard costs.
5. A negotiated shipyard discount, known as a "reduction",
showing $64,126.00 having been deducted from the cost.
ISSUE:
Whether the items presented for review in this matter
constitute duty-free operations by virtue of being either
modifications to the hull and fittings of the vessel, or expenses
generally related to drydocking which are considered duty-free
under judicial precedent.
LAW AND ANALYSIS:
Title 19, United States Code, section 1466, provides in
pertinent part for payment of duty in the amount of 50 percent
ad valorem on the cost of foreign repairs to vessels documented
under the laws of the United States to engage in the foreign or
coastwise trade, or vessels intended to be employed in such
trade.
In its application of the vessel repair statute (19 U.S.C.
1466), Customs has held that modifications/alterations/additions
to the hull and fittings of a vessel are not subject to vessel
repair duties. A leading case in the interpretation and
application of section 1466 is United States v. Admiral Oriental
Line et al., T.D. 44359 (1930), wherein the Court considered the
issue of whether steel swimming tanks installed on a U.S.-flag
vessel in a foreign port constituted equipment or repairs within
the meaning of section 1466. In holding that the installation of
these tanks did not constitute either equipment or repairs and
therefore was not dutiable, the Court in Admiral Oriental cited
earlier court decisions which define equipment, promulgations by
the Board of Naval Construction, and regulations of the Treasury
Department, as well as opinions of the Attorney General.
Accordingly, for purposes of section 1466, dutiable
equipment has been defined as:
...portable articles necessary or appropriate
for the navigation, operation, or maintenance
of a vessel, but not permanently incorporated
in or permanently attached to its hull or
propelling machinery, and not constituting
consumable supplies. Admiral Oriental,
supra., (quoting T.D. 34150, (1914)).
By defining what articles are considered to be equipment,
the authority cited above formulated criteria which distinguish
those items deemed to be modifications/alterations/additions to
the hull and fittings and therefore not dutiable under section
1466. These items include:
...those applications which are permanently
attached to the vessel, and which would
remain on board were the vessel to be laid up
for a long period... Admiral Oriental,
supra., (quoting 27 Op. Atty. Gen. 228).
In regard to those three items which are claimed to be
modifications rather than repairs, we find as follows:
1. In the matter of the addition of the inspection access
plates in the boilers, we find that the cutting out of welded-in-
place "handholes" and the installation of bolted-in access doors
is a modification to the vessel which does not address a wasted
or deteriorated area. This item is considered duty-free.
2. In the matter of the replacement of "mild steel" bolts
on the anchor windlass brake, we have no information regarding
the condition of the bolts at the time of their replacement.
Even if an up-grade in the durability of the bolts is insured by
their replacement, duty would still be owing if the bolts had to
be replaced in any case because they were defective or wasted in
any way.
3. In the matter of the cleaning and coating of the
forward deep tank in order to prepare it for a different class of
cargo, we find that Customs has specifically ruled on such an
operation in the past. In a published ruling (C.I.E. 196/60,
issued on March 2, 1960), Customs held that the cleaning and
whitewashing of a cargo storage area in order to protect a future
cargo from residue left by a previous one was not a repair within
the meaning of the vessel repair statute. We find the present
circumstances to be indistinguishable.
In regard to the overhead and shipyard discount elements of
this case, we find as follows:
4. In the matter of overhead charges, we note that the
specific categories of charges mentioned are office salaries,
rent, and insurance. We do not know exactly what is contemplated
by the term "rent" in this case. The only specific exception to
the payment of vessel repair duties which includes a "rental"
element involves the rental of tools used in shipyard operations.
To the extent that other rentals are involved, we hold them to be
dutiable. Salary and insurance items may be considered together.
In a published Treasury Decision of long standing (T.D.
55005(3), December 21, 1959), it was determined that:
Taxes paid on emoluments received by third parties
for services rendered...and premiums paid on workmen's
compensation insurance, are not charges or fees within
the contemplation of the decision of the Customs Court,
International Navigation Company v. United States, 38
USCR 5, CD 1836, and are therefore subject to duty as
components of the cost of repairs under [section 1466].
"Emoluments" as used in the cited decision include all wages paid
to third parties as part of the contract for foreign shipyard
services. The language concerning insurance is self-explanatory.
In light of this decision, the salary and insurance components of
this vessel repair entry are subject to duty under the statute.
5. In the matter of negotiated discounts or reductions in
the payable amount, the Customs Service, in a published ruling
(C.I.E. 227/63), held that the actual expenses borne by the
vessel operator should be taken into consideration when duty is
assessed under the vessel repair statute, and that discounts
should be allowed in liquidating vessel repair entries.
Accordingly, that portion of the discounted amount which is
attributable to dutiable repairs should be deducted from the
cost of those repairs.
HOLDING:
After a thorough consideration of the facts as presented,
and following an analysis of the law and applicable judicial and
administrative precedents, we have determined to allow the
application in part and to deny it in part, as specified above.
Sincerely,
B. James Fritz
Chief
Carrier Rulings Branch